Attaching Strings to State Higher Ed Funding is Largely Ineffective

by Rob Moore

Between the implementation and subsequent dialing back of No Child Left Behind, the charter school movement, and the national proliferation of standardized testing, performance standards have been a fixation of American education policy in the 21st Century. While these large shifts in K-12 policy have garnered a lot of attention, a part of the trend that has largely happened under the radar is the proliferation of performance standards for state higher education funding.

Performance-based educational funding (often referred to as “performance funding”) makes state funding for universities contingent on the achievement of certain quantitative benchmarks. The most common benchmark is degree completion, which nearly all state performance funding formulas include. About half of the states with performance funding have benchmarks for minority or disadvantaged student achievement and two (Kansas and Florida) have benchmarks based on subsequent labor market earnings for graduates.

The first wave of performance funding, termed “PF 1.0,” started in the late 1970s as more policymakers became attracted to application of microeconomic incentive theory to public policy contexts. Over the course of the next 30 years, however, performance funding did not enjoy a great deal of success and about half the states that put performance funding standards in place repealed their standards or allowed them to expire.

Over the past ten years, though, a new wave of performance funding deemed “PF 2.0” has proliferated to state legislatures across the country. Unlike PF 1.0 plans, which tended to be legislative directives with little input from universities, PF 2.0 plans tended to involve university administrators in the crafting of the plans. Currently, 37 states have some sort of performance-based formula attached to their funding of state college and universities.

Unfortunately, evaluations of effectiveness of performance funding formulas find little evidence to show they are bringing about desired results. For instance, a recent study by the Wisconsin Center for the Advancement of Postsecondary Education found little evidence to suggest that performance-based funding formulas improve graduation rates.

A qualitative research study released last month focusing on three PF 2.0 states found more positive signs, in particular that universities seem to be shifting their policies to bolster their counseling, tutoring, and remedial education programs. This could mean that these schools will be providing additional resources to disadvantaged students, helping them make up for disadvantages they come to school with.

Unfortunately, these positive shifts were accompanied by policy changes that undermine student outcomes. In particular, a substantial number of interviewees reported that universities were taking steps to restrict admission to students most likely to graduate and weakening graduation standards to lower the bar for students, thus potentially decreasing the value of their educational experience and barring disadvantaged students from admission to universities in the first place.

Quantitative empirical research has provided more evidence that unintended consequences are causing schools to make themselves less helpful as engines of economic mobility. A 2014 study found that Indiana state universities significantly raised test score admissions standards after the implementation of a PF 2.0 policy in the state compared to other comparable universities throughout the country.

As more states flirt with performance funding and tweak their current performance funding formulas, policymakers should heed the growing research suggesting that performance funding is far from a surefire policy to improve educational outcomes at public universities. The twin problems of weak outcomes from past performance funding policies and unintended consequences that can shut out disadvantaged students and weaken standards for admitted students provide a cautionary tale for higher education policymakers and suggest that improving higher education outcomes is more complex than instituting blunt microeconomic incentive structures.

Rob is a Master of Public Policy candidate at the Goldman School of Public Policy and an editor at Policy Matters Journal.